DATATRAK: Low Valuation, Improving Results

By Mike Havrilla on 10/12/09

DATATRAK International Inc. (OTC: DATA.PK) is a clinical trials information technology (IT) and services company that is focused on increasing its share of an estimated $720 million (M) Electronic Data Capture (EDC) market opportunity (with about 50% or $360M of this market still utilizing paper records that have yet to convert to make the digital conversion) (Source: Credit Suisse Industry Report, August 2009). The EDC market is dominated by Phase Forward (NASDAQ: PFWD) and Medidata Solutions (NASDAQ:MDSO), which have over two-thirds combined market share.

DATATRAK has taken a unique approach of delivering its products and services through a single platform known as DATATRAK ONE.  DATATRAK ONE offers one vendor, interface, and database for its clients to minimize expenses, increase efficiency and simplify the IT infrastructure as a third alternative to its two larger competitors with plenty of room to increase its market share of a growing EDC market. The EDC market is estimated to grow at 15% per year through 2012 with an estimated 80% share by 2011 as paper records are converted to digital and a total estimated market opportunity of $1.4 billion in 2012 (Source: William Blair Industry Report, March 2009).

Several long-term trends in the bio-pharmaceutical industry and the drug development process are key underlying factors in the growth of the EDC and clinical trial management market, including the factors outlined below. Click here to view a three-minute demo video for the Company’s eClinical Platform.

1.) Expediting the drug development process in order to get drugs to the market quicker or halt development to conserve resources if safety issues or lack of effectiveness occurs.

2.) Bio-pharmaceutical companies are focusing their time and efforts on the drug discovery process, R&D, and / or marketing activities while outsourcing the process of managing clinical trials / data for cost savings benefits and more efficient, streamlined operations.

3.) Outsourcing the process of IT / data management and clinical trials management makes this process a variable cost that is only present when an active study is ongoing.

4.) Advantages of digital conversion from paper recordkeeping speeds up the process of data access and sharing.

5.) The increased focus by the FDA on post-marketing safety surveillance, adverse event / drug safety monitoring and post-approval safety trials – see this PR from the FDA in early September for an overview and links to the post-marketing study and reporting requirements.

DATATRAK has made significant improvements since 2006 when the Company derived nearly half (44%) of its revenue from a single client. In 2007, this figure declined to 15% ($6.2M) of total revenue from one major client. In the following year, the Company eliminated a $3M note so that no significant debt remained on the balance sheet. Adjusting for a legacy severance charge in 2009, DATATRAK is near break-even operating results.

As of mid-2009, DATA reported $1.6M in cash / equivalents, approximately $0.23M in total debt and 13.7M shares of common stock outstanding. In mid-August, the Company reported 2Q / 1H09 results which included break-even results and a gross profit margin of 75% (up 15% from the year-ago period) for the latest quarter despite a decline in total revenue. Revenue for 2Q09 was $1.83M (versus $2.25M during 2Q08) while combined direct cost + selling, general & administrative (SG&A) expenses declined by about $2.1M.

The Company’s 1H09 revenue declined by 10% from the year-ago period to $3.9M, but the net loss was drastically reduced to ($0.83M) or ($0.06/share) thanks to a reduction in combined direct cost + SG&A expenses of approximately $3.7M. As of midyear, DATATRAK had a backlog of $8.5M, which consists of anticipated revenue from authorization letters to commence services, statements of work, and other signed contracts yet to be completed (while verbal agreements / commitments are excluded from this total). In addition, this reported backlog figure does not reflect the a recently announced signing of a letter of intent in late August with a leading global clinical research organization (CRO) for trial services for two new multi-center, five-year studies as part of a Phase 3 trial awarded to DATATRAK by the European division of a Global Top 20 Pharmaceutical company in July with an estimated backlog amount of $745,000.

On 9/23/09, the Company announced the signing of two worldwide studies, including (1) a six-year, 400-patient registry study at a leading academic institution for a Dynamic Volume CT Technology trial and (2) a two-year Phase 3 study with a global pharmaceutical company utilizing DATATRAK’s web-based Randomization, Drug Inventory, EDC, Medical Coding and Lab Data Import modules for deployment across 40 sites. On 10/7/09, DATATRAK announced the award of a six-year U.S. study for evaluating the use of a thoracic stent graft in aneurysm repair.

In late July, Phase Forward announced its quarterly results along with a deal to acquire privately-held Maaguzi LLC, which provides Web-based, electronic patient reported outcomes (ePRO) and late phase solutions, for $11M in cash to capitalize on the transition from paper, diary-based reporting by patients as part of collecting study data. The Chairman / CEO of Phase Forward, Bob Weiler, stated at this time that, “Customers are increasingly looking for a broader, end-to-end, integrated clinical research suite (ICRS) from a single, trusted vendor. . .”

This statement validates the single-platform business model of DATATRAK and the Company has posted improving operating results that are near break-even for the previous three quarters along with a market cap of about $4M that includes approximately $1.3M in net cash and trailing 12-month revenue of $8.4M. The enterprise value ($2.7M) / sales ($8.4M) ratio for DATA is a paltry 0.32X and the improving operating results and expense reductions make the Company a compelling turnaround candidate given the low market valuations at this time. 

During a phone interview that I conducted on 9/24/09, Chairman / Interim President and CEO, Laurence P. Birch, also noted that its larger competitors in the space such as PFWD and MDSO trade at price / sales ratios of approximately 2.5 – 3X and the equivalent valuation for DATATRAK would yield a share price of about $2/ share. In addition, Mr. Birch stated that he is not interested in selling the Company, but rather building value on time by gaining market share and continuing the positive momentum in operating results to enhance shareholder value from the currently depressed levels.

Click here to visit DATATRAK’s corporate profile page at OneMedPlace and the Company’s most recent corporate presentation from last month is available at the research downloads section.

Disclosure: No positions.

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